Commentary: Who's calling it right on tin, London bears or Shanghai bulls?

LONDON (Reuters) - In London the price of tin has just fallen below the $20,000-per tonne level for the first time since January.

FILE PHOTO: Chinese workers unload a roll of tin plate

The London Metal Exchange (LME) three-month tin price is currently trading at $19,685. It has consistently under-performed the rest of the base metals complex since the start of last year.

In China the Shanghai Futures Exchange (ShFE) tin price is also in retreat but only after trading at its highest level in 10 months amid surging volumes and open interest.

Is this divergence just another manifestation of the splintering of global pricing occasioned by the rise of Shanghai?

Or does it actually say something useful about this market’s underlying dynamics?

LONDON BEARS

To some extent tin’s weakness in London can be seen in the context of the broader risk-off sentiment that has accompanied the steady escalation of global trade tensions.

But tin’s underperformance relative to the rest of the LME base metals pack is noteworthy.

It is down by more than 5 percent since the start of last year. The next weakest performer, lead, is up by over 15 percent over the same period.

The latest slump in price looks incongruous given consistently tight time spreads and, right now, a dominant long position holder controlling just about all the LME stocks.

Such tightness, however, says as much about the LME contract’s low level of liquidity as it does about the broader market.

The benchmark LME spread, cash-to-three-months has traded in persistent backwardation since April 2017. The cash premium of $85 per tonne as of Wednesday’s close is modest relative to a premium of $320 as recently as April this year.

Someone is holding over 90 percent of LME stocks, according to the LME’s latest position reports, but exchange inventory is low at 2,755 tonnes, even if it has edged higher in recent weeks.

Tightness in the London market is of the paper variety, reflecting the time and volume gaps between industrial and fund flows.

It does not reflect any tightness in the physical market. Indeed, it is the weight of oversupply that is pressing down on the outright price.

INDONESIAN EXPORTS UP; CHINA’S TOO?

The two main supply variables in the global tin market are Indonesia, the world’s largest exporter, and China, the world’s largest producer.

Indonesian exports fell by almost 13 percent over the first four months of this year, due to the latest in a long-running series of adjustments to the tin export regime.

This time it was the transfer of export rights authority from the Energy and Mineral Resources Ministry to the Trade Ministry which log-jammed outbound flows.

The hold-up seems to have now been resolved with the issuing of export licences to 12 companies for a total 51,368 tonnes.

Certainly, May’s official exports rebounded to 12,493 tonnes, lifting the cumulative total over the first five months of this year to 33,775 tonnes.

That’s up 7.6 percent on the same period of 2017 and last year was the strongest export year since 2013.

China’s trade figures for April and May are still pending but the trend in the first quarter of this year was one of net exports of refined tin.

The official count of 1,208 tonnes may be only the tip of the iceberg, however, with suggestions that unreported outbound flows are once again seeping into the market.

Certainly, refined tin production in China grew strongly by 8 percent to 56,800 tonnes in January-April this year, according to the ITA.

That partly reflects increased domestic mine production, particularly in Inner Mongolia, where output is expected to rise by 6,000 tonnes this year, the ITA forecasts.

But the foundation for higher capacity utilisation rates by China’s smelters remains the flow of raw material coming over the border from Myanmar.

SHANGHAI BULLS

Myanmar emerged as a major source of tin concentrates in 2013 and the ITA estimates China’s imports increased by another 31 percent to 18,000 tonnes (contained metal) in the first quarter of this year.

The surge is being attributed to the liquidation of stocks by the local government in Myanmar’s tin-producing region rather than an increase in mined output.

Indeed, the ITA’s own sources have suggested that Myanmar’s easily accessible reserves are rapidly dwindling with expectations in the Chinese market “that lower concentrate supply from Myanmar will impact tin production in the months ahead.”

Rumours that the Myanmar tin well may be running dry seem to have been the narrative cover for a surge in the Shanghai tin price to a 10-month high of 157,560 yuan per tonne at the end of May.

As is often the way with Chinese exchanges, the surge was accompanied by an explosion in trading activity.

May’s trading volumes of 605,770 lots were the heaviest monthly total since November 2016, while the 54,588 tonnes of open interest at the end of May was the highest since the ShFE launched its tin contract in 2015.

The price spike proved short-lived and the most active Shanghai contract is today trading back around the 145,000-yuan level, although open interest remains higher than it was before the rally.

FLAWED SIGNALS

Two different tin markets, two different signals, but which to heed?

In truth, both are problematic.

The London contract is increasingly beholden to its own volume metrics, witness the persistent backwardation across the front part of the curve which seems so counterintuitive when the outright price is sinking.

The Shanghai contract, on the other hand, continues to be dominated by speculative players surfing waves of momentum such as that seen at the end of May.

The ShFE is considering introducing a market-maker scheme to try to boost liquidity in inactive trading months and bring in more industrial players, Zhang Zhiyong, the head of the exchange’s nonferrous department, told the ITA Tin Conference in Budapest last month.

Price signals from both are inherently flawed but with tin’s fundamentals currently so dependent on the state of play in Myanmar, any change to the flow of raw material to China’s smelters is more likely to be picked up first by Shanghai.

The price spike at the end of May may have been a false alarm. The next one may not be.

— The opinions expressed here are those of the author, a columnist for Reuters —